Underperforming forex reserves

Malaysia’s international reserves stood at US$114.6bil (RM486.5bil) as at end-December 2022, down from US$116.9bil (RM496.3bil) as at end-December 2021.

PETALING JAYA: Despite a record trade surplus in 2022, Malaysia’s international exchange reserves underperformed, declining on an annual basis last year. So, where did the money go?

According to analysts, the gap reflected, in part, the foreign portfolio outflows through 2022, pressure on the ringgit, as well as Bank Negara’s intervention in the foreign exchange (forex) market to absorb and stabilise the impact of the US Federal Reserve’s (Fed) interest rate hikes and China’s deteriorating growth outlook on the local currency during the year.

Data from the central bank showed that Malaysia’s international reserves stood at US$114.6bil (RM486.5bil) as at end-December 2022, down from US$116.9bil (RM496.3bil) as at end-December 2021.

That was sufficient to cover 5.2 months of imports of goods and services and represented 1.0 times of the total short-term external debt.

Despite the notable cumulative increases in monthly international reserves between November and December, thanks to a robust current account surplus, ongoing foreign direct investment flows and less pressure on the ringgit, the gains were insufficient to fully offset the losses for the entire year.

“The outflow of foreign funds from our capital market were the main driver leading to the decline in our forex reserves last year.

“This came as investors took positions to prepare for the Fed’s aggressive rate hikes in 2022,” an analyst with a local brokerage told StarBiz.

Another analyst with a bank concurred, noting that the outflow of foreign funds resulted in the weakening of the ringgit against the strong US dollar.

“We believe Bank Negara’s move to smoothen the volatility of the ringgit against the US dollar had in part led to lower forex reserves year-on-year,” he added.

During the year under review, Malaysia recorded foreign portfolio outflows totalling RM5.6bil, as compared to total inflows of RM30.4bil in 2021.

The foreign portfolio outflows in 2022 were solely driven by outflows from the country’s debt market, which totalled RM9.8bil, while the domestic equity market recorded cumulative inflows of RM4.2bil.

Amid the foreign fund outflows and the strengthening of the US dollar, the ringgit weakened about 5.5% against the greenback from around RM4.17 per unit at the start of the year to RM4.41 per unit at the end of 2022.

Meanwhile, UOB Global Economics & Markets Research (UOB Research) noted in a recent report that the central bank’s net short position in forex swaps had increased for the 12th consecutive month by US$1.6bil (RM6.8bil) to another record high of US$26bil (RM110.4bil) as at end-November 2022 from US$24.4bil (RM103.6bil) at end-October 2022.

“It continues to mark the longest streak of increases for net short position since data began in April 2000, due to the combined impact of US Fed’s rate hike cycle and China’s deteriorating growth outlook on ringgit during the year,” the banking group said.

“The fresh record of US$26bil (RM110.4bil) net short position in forex swaps was equivalent to 23.7% of total foreign reserves (end-October: 23.2%),” it added.

Separately, Malaysia’s full-year trade surplus rose to a record of RM255.1bil in 2022 from RM253.7bil in the preceding year, thanks to the strong double-digit growth in export and import at 25% year-on-year (y-o-y) and 31.3% y-o-y, respectively.

However, trade is expected to be slower in 2023, in tandem with the anticipated lower global economic growth.

According to Maybank Investment Bank Research (Maybank IB Research), global gross domestic product growth will likely slow to 1.7% in 2023 from the expected 2.9% in 2022, amid increasing signs of stagnation or recession in major advanced economies such as the United States and Europe.

As such, Maybank IB Research forecast slower export and import growth of 4% y-o-y and 6% y-o-y, respectively, for Malaysia in 2023. This could result in a narrower trade surplus of RM240bil for the country this year.

As for the financial market, volatility is also expected to persist through 2023.

Nevertheless, the prospects of foreign buying interest returning to emerging market (EM) assets have somewhat brightened following China’s reopening early this year, UOB Research said.

“The current market expectations for the Fed reaching the peak of its interest rate-hike cycle by the first quarter of 2023, alongside a continuation of China’s economic stimulus and consensus of still-positive growth outlook for most Asian countries versus a projected mild recession in major advanced economies have also augured well for EM currencies including ringgit,” it explained.